Euro Slumps to 4-Year Low

We had a very soggy weekend here in St. Louis, which continues this morning. It rained on the precious metals on Friday, too, along with the currencies that weren’t dollars, and yen (JPY)…

The overnight markets have continued with the theme from Friday’s price action, which is to sell euros (EUR) and on the crosses bring the other currencies down… Gold, which was up $13 when I signed off on the Pfennig, Friday morning, ended up losing $6, which is a $19 turn-around… The media blamed the gold sell-off on the strong US retail sales, which posted a better-than-forecast number for April of +0.4%, with March’s number revised upward from 1.6% to 2.1%… A strong revision, I must say!

So… In my mind, I say, OK… Maybe gold backs off a bit on those numbers, with the thinking that if the US economy is recovering (and that’s a BIG IF), then the need to buy the “uncertainty hedge” is diminished… But… I think it was more than that! I think that seeing some weakness, the gold price manipulators jumped at the chance to add to the selling. Folks… A $19 turnaround, when all looked well for the shiny metal, was just too much in my opinion. Therefore, there had to be the “invisible hand” in there at some point… That’s my story and I’m sticking to it!

Think about this for a minute… Let’s say you know someone who has dragged their feet and lollygagged their way around the “buy gold” mantra… Well… They could use this $19 turnaround as an opportunity to buy on the “dips”… Call them up and tell them so…

Risk aversion has really set in deep, folks…

Well, I purposely tried to stay away from talking about the euro from the get-go this morning, because this is the stuff that depresses me… I told you on Friday that I’m afraid that the euro’s title of “dollar offset” may be in danger… But I didn’t go any further on that thought… So, here goes…

The problem with the euro losing the title of “dollar offset” is that there’s no other currency with the liquidity right now to replace the single unit… Japanese yen comes to mind, but Shoot Rudy, Japanese yen has traded alongside the dollar for a month of Sundays, so not much of an “offset” there!

There are a ton of calls out there saying that the euro is going to collapse, and the Eurozone countries will return to their legacy currencies… Yeah, right… Like that could happen overnight! That would take a very long time to work out, folks… Think about it, the cash machines, the cash registers, the folding money supply, what to do with all those euros people own, etc. I just don’t see this as a possibility…

What I do expect to see is the European Central Bank (ECB) step in at some point and protect the euro… That probably won’t happen unless the euro continues to crumble in price, to a level below 1.20…

European Finance Ministers are meeting this morning, as I type my fat fingers away. The euro’s level this morning of 1.2325 is the lowest level for the single unit in four years… Remember, though, in 2005, when a lot of the same people calling for the euro’s collapse now, said that it would collapse then too, the euro fell to 1.18 before heading back to higher ground.

2005, was a double whammy for the euro, in that, 2005 was the year that there were a couple of “no votes” from Sweden and Denmark, to join the euro… And… It was the tax amnesty year for US corporations doing business overseas to bring their profits back to dollars at a hugely reduced tax rate… $300 billion in those overseas profits came back to dollars that year… That’s more than the “flight to safety” during the financial meltdown in 2008.

So… There’s history here… OK.. Getting back to the European Finance Ministers meeting today! Italy announced overnight that they would join Portugal, Spain and Ireland in announcing budget spending cuts… But the markets aren’t really “buying it,” for these countries all made these budget cuts “under the gun”.

The European Finance Ministers need to come up with plans to prevent budget problems to come into play before they get out of control. They need a governance of these plans, and they need penalties for those who do not comply with the plans. Yes, it would take some time before each Eurozone country approved the plans… But the mere fact of creating such a plan would be a start… And a start is all the markets are looking for here, right now…

The thing that could really send the euro reeling would be a rebalancing of central bank reserves… Remember when it was going the other way, and central banks around the world were rebalancing their currency reserves, by selling dollars and buying euros? It took a long time to filter through the pipelines, for the central banks could not announce that they were doing this, for it would have pushed the euro buying through the roof, and the price to the moon, and if the central banks were attempting to buy the euro, they didn’t want to pay the new through the roof price.

If, in fact, central banks do decide to rebalance their currency reserves this time reversing their earlier trade from a few years ago, then it will be a “steal like” move… But any hint, any scent, and clue that they are doing this and it will deep-six the euro…

OK… Let’s talk about something else! I see that the Canadian dollar/loonie (CAD) has backed off its highs of last week, when it looked like it was heading to parity once again. You could almost see this coming, by watching the fall in the price of oil each day. But to me, this is nothing more than a blue light special for loonies… Oil isn’t going to continue to fall in price, in my opinion… Gold is still above its previous all-time high of $1,226, even though it suffered a $19 turnaround on Friday… All good signs for the loonie…

And then, let’s not forget the Canadian economy, which continues to recover… On Friday, Canadian manufacturing sales posted a solid 1.2% increase in March. Market expectations going into today’s report had been for a 1.0% gain in March. Manufacturing sales were very strong, along with manufacturing overall… So… Another notch in the rate hike campers’ belt.

There’s a region on the planet that continues to grow, and seems to be unaffected by the Eurozone’s problems… And that’s Asia… So… Outside Asia, you have the fundamentally, and fiscally sound countries of Canada and Norway… But in Asia, if you want real free-floating currencies, you have to add the “Pan” to Asia… To include Australia and New Zealand… But why not? If Asia is doing well, Australia and New Zealand stand to benefit, too…

In Asia, we have a lot of countries and currencies, but only a handful are “tradeable”… And even then, these countries have complete control over the value of their currencies, keeping them in line with each other for export competition reasons… Singapore, Hong Kong, Japan, India, and China are the only “real tradeable” currencies other than Australia and New Zealand… There’s something to think about in Asia, though… If the Asian economies are growing without the exports to the US dominating things, imagine how well they will be doing if the US continues to spend like they’ve started to do again!

So… It might be worth a flyer to be in on the ground floor, eh?

OK… Last Friday, the data here in the US was good… I already talked about the retail sales… In addition, we had capacity utilization and industrial production, which were all good… Today, we get the skittish Empire Manufacturing Index, and the TIC Flows, which should be interesting, given the ballooning size of our budget deficit…

Looking ahead on the week… Here in the US we’ll see housing numbers, the stupid CPI, FOMC meeting minutes and a slew of second and third tier data… Around the world, we’ll see Reserve Bank of Australia (RBA) minutes and UK and Eurozone inflation data tomorrow. Wednesday the Bank of England (BOE) minutes print. On Thursday we have the New Zealand Budget and UK retail sales. Friday we’ll see the German IFO survey, and Canadian CPI…

So… It will be a busy week, data wise, here and overseas…

Then there was this… I was reading a report this past weekend that showed Fed Heads indicating that they would not raise interest rates this year… Any plans they had to do so were deep-sixed by the Eurozone debt crisis… The Fed Heads will point to the Eurozone, and claim that their debt problems emphasize the importance of keeping interest rates at zero.

I think this is a bunch of bunk… But… They’ve led us down the road to ruin this far, they might as well take us the rest of the way!

To recap… The selling of the euro has not stopped, and the single unit is now trading at a 4-year low. Gold also got sold on Friday, and overnight… Chuck thinks that there was more to the selling than just a strong retail sales report in the US and… Canadian loonies have lost ground, as the price of oil flounders, providing an opportunity to buy loonies cheaper…

Chuck Butler is President of EverBank® World Markets and the author of the popular Daily Pfennig newsletter.

With a career in investment services and currencies extending over 35 years, Mr. Butler oversees all aspects of customer service and the trading desk for EverBank World Markets. A respected analyst of the currency market, Mr. Butler has frequently made appearances or been quoted by the national media. These include the Wall Street Journal, US News, World Report, MarketWatch, USAToday, CNNfn, Bloomberg TV, CNBC, and the Chicago Tribune.

Mr. Butler was previously the Chief International Bond Trader and
Director of Risk Management for Mark Twain Bank, and has held significant positions in the investment industry since 1973.